A collection of observations, news and resources on the changing nature of innovation, technology, leadership, and other subjects.

June 11, 2014

Is a College Education Still Worth It?

NY Times editor David Leonhardt recently wrote a column with the provocative title: Is College Worth It? The question has been raised by articles which note that college graduates are still struggling to find meaningful work and often end up accepting jobs for which they feel overqualified. Then we have the student debt crisis. The average student debt for college graduates is over $25,000, and the aggregate debt for student loans now exceeds $1 trillion.

“The decision not to attend college for fear that it’s a bad deal is among the most economically irrational decisions anybody could make in 2014,” is Leonhardt’s succinct answer to his question. He cites a recent article by MIT economist David Autor which points out that a college-educated worker can expect an additional lifetime earning of over $500,000 compared to one whose highest degree is a high school diploma.

“Over the long run, college is cheaper than free,” remarks Leonhardt. “Not going to college will cost you about half a million dollars.” Experts and journalists questioning the value of a college education are most likely obsessing to get their toddlers into an elite nursery school, so they are on-track for the right schools over the ensuing 20 years.

Professor Autor’s article, Skills, education, and the rise of earnings inequality among the “other 99 percent”, was published in the May issue of Science. “The singular focus of public debate on the top 1 percent of households overlooks the component of earnings inequality that is arguably most consequential for the other 99 percent of citizens: the dramatic growth in the wage premium associated with higher education and cognitive ability,” he writes in the abstract.

A few numbers illustrate this college wage premium. First is the $500,000 cited by Leonhardt. Between 1965 and 2010, the lifetime present value, - after accounting for tuition costs, - of a college versus a high school education has risen from $213,000 to $590,000 for men and from $129,000 to $370,000 for women.

Autor estimates that the difference in the yearly earnings between a college-educated two-income family and a high school-educated two-income family has risen by $28,000 between 1979 and 2012. This is four times as large as the household inequality gap between the 1% and the 99% that’s been so widely discussed, especially since the release of the English version of Capital in the Twenty-First Century by French economist Thomas Piketty.

The income rise of to the top 1% of American households over the past three decades has indeed been extraordinary. Between 1979 and 2012, the share of household income going to the top 1% of household rose from 10% to 22.5%. In actual numbers, this means that every year since 1979, over $7,000 per household have been re-distributed from the 99% to the 1%.

However, the gap is significantly higher when comparing the median earnings of college and high-school educated workers. In 1979 the gap was over $17,000 for males and almost $13,000 for females. In 2012 these gaps have nearly doubled to almost $35,000 for males and over $23,00 for females. To translate individual incomes to household incomes, Autor chose to compare two-earner households with similar degrees. If the two earners are college educated, the household earnings rose by $28,000 between 1979 and 2012, compared to a similar two-earner household where both have high school degrees.

These figures suggest that the education differentials are arguably more consequential for the vast majority of workers, those in the 99%, than the dramatic earnings rise of the 1%. And, particularly troubling is the fact that the education differential is not only due to the rising earnings among college-educated workers, but also to the falling real earnings among non-college-educated workers.

“Between 1980 and 2012, real hourly earnings of full-time college-educated U.S. males rose anywhere from 20% to 56%, with the greatest gains among those with a postbaccalaureate degree. During the same period, real earnings of males with high school or lower educational levels declined substantially, falling by 22% among high school dropouts and 11% among high school graduates. Although the picture is generally brighter for females, real earnings growth among females without at least some college education over this three-decade interval was extremely modest.”

What accounts for this growing earnings gap? According to Autor, it’s mostly a matter of supply and demand. I like the simple framework that he co-developed in previous papers to understand the impact of technology on the skills requirements of the labor market. It helps explain the rising demand for college educated workers and the stagnant and/or declining wages of high school graduates.

In this framework, work tasks are classified along two dimensions: whether they are cognitive or manual; and whether they are routine or nonroutine.

Routine, cognitive tasks are those human information-based activities that can be well described by a set of rules. They include performing calculations, record keeping, dealing with simple customer service questions, and many kinds of administrative tasks. These white-collar activities have been prime candidates for technology substitution or automation, as well as for offshoring to lower-cost countries.

Routine, manual tasks are those physical tasks that can also be well described by a set of rules. Many manufacturing activities in assembly plants fall into this category. These blue-collar activities have also been prime candidates for technology substitution and offshoring.

Non-routine, manual tasks are physical tasks that cannot be well described by a set of rules that a machine can follow. Many low skill, low pay activities fall into this category, such as janitorial services, gardening, fast-food restaurant jobs and health care aides. These jobs have continued to grow, since they are impervious to automation or offshoring.

Non-routine, cognitive tasks comprise the final category. These are generally high-skill human activities that involve expert problem solving and complex communications for which there are no rule-based solutions. Examples of expert problem solving include sophisticated medical diagnosis, complex designs, many R&D tasks, making decisions in complex organizations and software architects. Examples of complex communications include managing and leading large groups, teaching, writing books and papers, arguing legal cases, and selling sophisticated equipment.

In technologically advanced economies like the US, large numbers of mid-skill, mid-pay jobs where a high school education previously sufficed have been automated by information technologies or have moved to less expensive regions around the world. At the same time, opportunities have continued to expand in high-skill, high wage jobs that put a premium on a highly educated workforce with analytical and social cognitive skills.

This explains the rising demand for college educated workers over the last several decades. The supply of such college educated workers also went up rapidly through the 1960s and 1970s, but it then sharply decelerated from the early 1980s through the next 25 years, as the number of young men going to college went down significantly. A major factor in the reduction of college-educated males was the end of the Vietnam War. Many draft-eligible young men who had earlier enrolled in college to defer their military service stopped doing so once the war ended.

Autor’s analysis of these simple supply-demand dynamics reveals that the college-high school earnings gap was relatively flat in the late 1960s and early 1970s when college enrollment surged to avoid the draft, and then rose significantly once the war ended and college enrollments rates dropped while the demand for college graduates continued to rise. Since 2005 the production of college graduates has once more accelerated and is reflected in a somewhat slower growth in the college wage premium.

The Sciencepaper concludes with a discussion of inequality in a market economy, - its positive social values versus its potential social costs. “There’s a value to inequality in a market economy,” Autor argues in a follow-up interview. “Inequality provides incentives. But you can have too much inequality, or too little. The concern about inequality is where economic dynamism gives way to dynasticism, and inequality becomes self-reinforcing: If you don’t choose the right parents, you’re stuck in the bottom forever.”

The real problem is not inequality per se, but the lower earnings and employment opportunities of less educated workers, and its very serious, negative impact on families, communities and society. There is no more important policy for the US to follow than investing in the education of its citizens, as it so successfully did in the first half of the 20th century. Such investments need to now span preschool, primary and secondary education, post-secondary schools and four year colleges, as well as lifelong retraining as old jobs disappear and new skills are required.

As for the question, is a college education still worth it?, Professor Autor’s answer is simple and direct: “If you had to give a person a single piece of economic advice, it would not be: Act like Gatsby and try to get into the top 1 percent. It would be: Go get a college education at a decent school.”

Comments

The increase in men going to college, in the 1960s, because of the vietnam war and draft, provided microeconomists an opportunity to do some coontrolled studies, looking at how well the men who would otherwise have not been expected to go to college fared. They found that these men had similar outcomes in terms of graduation, and in financial success in life. These studies confirmed some of WW II GI Bill students. Those sttudies were more confunded by the circumstances of returing from the war, and control was harder. Part of the decline in the absolute number of men going to college, was the baby bust, but in recent years, there is a real shift with women making much more access to education. The the studies certainly sugggest that a large part of the current male cohort is missing a big opportunity. Some have argued that college graduation simply represents the smart people, who were going to be a success either way. The studies put that to bed, and show positive value tto everyone.

As is the case for the articles that you have written in the past, I find this article to be spot-on. I know mind-space of the reader must be considered, time is short in planning, preparing and publishing your weekly blogs. I appreciate your ability in writing concise, tight and informative articles.

With the above said, I think whether or not a person goes to college or not is broader in context than the amount of money an individual may or may not earn depending on the level of his or her education. The major problem that I fear coming is the lack of sufficient jobs of quality in many areas of our country. A college degree may be the ticket to success if you live in Silicon Valley or down on Wall Street, but will it make a difference if you live in the mountains of West Virginia, the plains of the upper Western Mid-West or the inner-cities? Maybe college versus high school will help some in downtrodden or lower density areas of America, but only for a few. The many will continue to fall through the cracks.

In times gone by, our jobs market could be demonstrated as a kind of pyramid with a few high level, high paying executive and professional positions, sports and movie star-types at the peak. In the middle was an order of magnitude of more well paying jobs, with another ten-fold or larger group at the bottom of the pyramid doing the low paying manual labor, personal service and healthcare types of jobs. Today, our pyramid symbol of job types and pay has distorted into more of an hour-glass, an hour-glass with a much broadened and flattened base of semi-skilled, low paying jobs and a top of the glass that is somewhat enlarged but not sufficient to soak up all those better educated, mid-level job seekers.

Technology caused much of the middle to fall away conforming to this generally accepted perception. However, the movement of manufacturing and middle skills work “offshore” is more the culprit, I would argue. The notion that we can educate our way to a better job is valid for the individual, unfortunately the space at the top is limited in this country, certainly at many locations within the country. Under current policies and practices, many of the high paying, intellect based jobs will go offshore as well. India, London Financial, Singapore and others demonstrate that phenomenon today.